Risk of Another Crash

Ever since the collapse of British loan platform Lendy, I have been seeking a way to address the possibility of another collapse. Other bloggers offered tips on recognising the warning signs and pulling out in time – but the signs may show up too late, and anyway, selling failing loans to other investors won’t help the community at large.

Our real goal should be to prevent the next collapse altogether, so we can continue investing in this lucrative asset class, at lower risk. That requires taking a hard look not just at Lendy, but also at the platforms we are trying to preserve.

Troublesome Findings

Generally speaking, European loan financing platforms are run by serious people with good intentions. They make an honest effort to be transparent, listen to investors, and protect our interests. But they are not perfect. The harder I looked, the more cases I found where transparency was lacking, risk was understated, marketing terminology took over objective and honest reporting, and not every step was taken to protect investors’ interests.

I considered publishing general guidelines for lending platforms. But as much as those platforms are open to suggestions, no business is quick in recognising its own shortcomings and revealing unflattering truths. “Lack of transparency? That’s somebody else’s problem*!”

Reality Check

In retrospect, it’s easy to point out Lendy‘s mistakes: poor screening of loan requests, misleading valuations, and incompetent collection procedures. But we must remember that Lendy did not set out to fail; they honestly believed in their methodology, and thought they were making every effort to protect investors. Ultimately, the thing that killed them was hubris – too much faith in their own abilities.

So how can a simple investor compel loan platforms to see their weaknesses? By scrutinising every platform and shining a public spotlight on the things they need to improve. Proud to introduce project TORCH.

What does TORCH stand for?

Transparency, Operations, Risk, Contingencies, and Honesty. Those are the categories on which platforms will be evaluated. Of course, I will try to adhere to similar values and be completely objective, honest and unbiased in my evaluations.

The word “torch” also has two phonetic meanings. As a noun, it means a “flashlight”, shedding light on dark corners, preventing concealment, increasing visibility and clarity. As a verb, it means “set on fire” – indeed, some platform will feel scorched by their TORCH evaluations.

Remember: My goal is not to shame any specific platform, or harm its business. Quite the opposite: The project aims to set a unified set of standards for better transparency and risk-control across all platforms, and encourage them to improve.

Ground Rules

Each platform gets a blog post with a list of standards, which I believe they must adhere to. I check if they pass or fail on each item, and highlight the issues.

Returns, features and design are not part of the criteria; only prevention of loss and foul play.

No affiliate links in any TORCH post. My goal is not to profit from this project, but to keep our current investments safe.

Reevaluations will occur over time. Failure to improve will be highlighted.

Future promises don’t count in the evaluation.

The strictest conditions apply. If a platform has 60 loan originators and one of them fails a test – the whole platform fails that test.

Only information published on the platform counts. I don’t care if the data is available for purchase from the company registrar. If it’s not on the platform, they fail the test.

However, any shit I dig up from external sources will be used against the platform.

Notes on the TORCH standards

Evaluations will be conducted on two levels. On the basic level, platforms are expected to be financially stable, have solid contingency plans, and provide full data. But beyond that, they are expected to be honest and objective in the way they present data. Information isn’t meant to be flattering, it’s meant to provide the whole picture.

For example, look at Lendy‘s growth chart:

Source: Lendy.co.uk

Although factually accurate, this chart is misleading. The use of cumulative figures gives the impression that Lendy kept a positive growth all the way to its bitter end. If they had shown monthly figures, you would see that their loan volume declined sharply throughout 2018 and 2019, which is why they ran out of cash. Compare to the correct way of presenting growth data, demonstrated by EstateGuru:

Source: EstateGuru

The use of cumulative figures is even more ridiculous when counting “registered users” – everyone who has ever opened an account on the platform. Imagine a traditional bank advertising on its homepage the total number of people that have ever walked into the bank over the past 250 years… Instead, the relevant figure here is the current number of active investors.

Yet another example of misleading statistics is the calculation of late and default loan ratio. When recently-issued loans are included in the calculation it skews the statistics, because those loans have not yet had a chance to run late or default. Here, historic data needs to be provided to give the whole picture. Get my drift?

Community Effort

I invite other investors to participate in the conversation, suggest improvements, double-check my work and let me know if I missed something or got anything wrong. And of course, share these posts and echo your concerns to the platforms. If we act together, we can have a greater impact on the industry.

On that note, I also intend to publish a TORCH post that focuses on investors, where I’ll discuss the change of approach that we need to make in order to keep our investments safe.

Launching in 3… 2… 1…

The first post will be published in the next few days. Until then, you are welcome to offer your thoughts, suggest standards, or request specific things that I should look into.

Wishing us a lossless tomorrow.

* The Somebody Else’s Problem field is simple, effective, and can run for a hundred years on a single torch battery. It relies on people’s natural disposition not to see anything they don’t want to see, or can’t explain.

Adapted from a quote by Douglas Adams in ‘Life, the Universe and Everything’

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Blog Comments (6):

Your TORCH initiative and Mintos Report and fantastic and deserve to be supported. I’ve invested in a lot of P2P but as an ex-banker am concerned about so many things in this industry. With over 100 platforms in Europe, a brutal shake-out is inevitable – but investors’ have a hard time assessing the risks of each one due to lack of transparency and other poor practices.

I’ve read dozens of blogs on P2P in Europe and almost all of them are complete rubbish – because:
1. they are not independent (earning commissions and other income from the platforms)
2. they are are more How To Invest manuals and don’t go into any depth
3. they are often misleading and plain wrong (recommending platforms that are clearly very dodgy, ignoring major problems with platforms

There is a real lack of transparency in this industry (in some many areas, it’s not worth listing them). This is partly because it’s a new industry, partly because investors aren’t demanding enough and partly because they industry is still not properly regulated like other finance vehicles.

I believe that if you continue doing reviews like the Mintos one, your work will have a very significant impact on the industry as a whole and specific platforms in particular.

Thank you very much for the comment. I always strive to be honest and objective, while blogging and in general. I do have other contents on this blog, where I mention the high returns and provide affiliate links, but even there I also mention the risks and my concerns.

The TORCH series strives to represent an even higher level of in-depth analysis, free of foreign interests, and entirely focused on keeping my/our current investments safe. I truly hope that platforms take my recommendations to heart, and that investors use these reports to demand more from platforms.

I do plan to publish more reports, as well as a post encouraging fellow investors to focus on the stuff that really matters.
Let’s hope I’ll to have some impact 🙂